Private Sector Perspectives on Risk

UNFCCC Workshop on Innovative Options for Financing the Development and Transfer of Technologies 27-29 September 2004

Charles Donovan Commercial Manager, Transactions CAT Alliance Ltd. T: +44 20 7421 6359 E: [email protected]

Enviros Consulting: Founding Member of CAT Alliance Ltd.

• Europe’s largest resource base for environmental due diligence • Owned by three environmental / energy consulting firms: Enviros (UK), Tauw (Netherlands), and COWI (Denmark) • Total staff of 5000+ and combined turnover of $400+ million • Transaction support to investors and developers in the global clean technology sector Slide 2

CAT Alliance Geographical Coverage

Slide 3

Let’s Start with the Basics

HIGH

Risk Tolerance and Required Financial Return

LOW

Common Equity Preferred Equity Mezzanine Debt Subordinated Debt Senior Debt Slide 4

Let’s Start with the Basics

Cost of Financing

HIGH LOW

Common Equity Preferred Equity Mezzanine Debt Subordinated Debt Senior Debt Slide 5

Private Sector Demands on Project Evaluation

•Exchange Rate Risks •Political Risks •Environmental Compliance Risks • Technology Risk • Operational Risks • Construction / Commissioning Risks • Counterparty Credit Risk • Commodity Price Risks Slide 6

Overview of Credit Risk Management

• Screening of counterparties • Development of trading limits and transaction limit processes • Monitoring and reporting of financial exposure against limits • Testing exposure to financial losses on individual transactions • Development of credit support packages (e.g. netting) that support efficient allocation of credit risk for multiple transactions What is my expected risk-adjusted return on capital?

Slide 7

Credit Enhancement in the Renewable Energy Sector

• Financial risk can be influenced by a large number of factors – credit risk is one area where governments and multilateral institutions can make a tremendous difference. • Energy financing is still recovering from unprecedented default events in 2001 and 2002. Industry is very focused on credit risk issues.

• Few well capitalised developers and suppliers (e.g. GE Energy) • The use of output-based subsidies to support renewable energy projects (e.g. Renewable Energy Certificates, CDM carbon credits) may lead investors to have complex and unwanted credit risk exposure.

• Financing renewable energy is at least as pressing a problem as how to make new projects economically viable.

• Public-private partnerships urgently need to address the credit gap. Slide 8

50 45 40 35 30 10 5 0 25 20 15

Commodity Price Risk: What is the Value of Carbon Credits?

Market Prices

Current Projected Phase I

CBM Price Projections

Phase II 90 %ile Range 50 %ile Range

Source: Enviros Consulting EU ETS Price Forecast

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Weather Economic Growth Can We Expect Bank Credit Committees to Understand This?

Baseline Emissions Phase I Allocations Phase II Allocations Historical Emissions Data Technological Uptake Forecasts Production Forecasts Allowance Allocation CO2 Emission Projections Demand for Allowances Banking and Borrowing Sector Surplus or Shortfall Allowance Prices Traded Volumes Sector Cost Abatement Curves Fuel Price Forecasts JI/CDM Cost Abatement Curves Supply of Allowances

Future development Slide 10

Looking Back: UK ETS Price Activity

14.00

12.00

10.00

8.00

6.00

4.00

2002 vintage 2003 vintage What sets the price when supply and demand are artificial?

2.00

0.00

13/02/2002 04/04/2002 Source: TFS, ICAP 24/05/2002 13/07/2002 01/09/2002 21/10/2002 10/12/2002 29/01/2003

Today’s price ~ £2.00/tonne

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Case Study: Durban, South Africa

• eThekwini Municipality (Durban) in South Africa is developing a 10 MW landfill gas-to-electricity project on three landfill sites.

• Recently signed an Emissions for the sale of $15 million in CDM carbon credits to the World Bank Prototype Carbon Fund. • An innovative project in many respects: One of very few independent power producers in South Africa, multi-site landfill gas collection system, and the project involves the largest waste transfer facility in Southern Africa. • No legally binding power purchase agreement (PPA) • Funded from the Municipal Balance Sheet – City of Durban was able to access low cost funds due to low inflation and very strong credit profile.

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• How do we create more successes like this?

• Is there a role for lease financing to reduce capital expenditure?

• Can these projects gain debt financing from private financial institutions?

• How can you access large-scale private sector debt investments?

Slide 13